Consensus on Wall Street is that the Uber (NYSE:UBER) IPO was disaster … but therein lies the bulk of the opportunity. The thesis today is that the stock is a hold for the long term and that the investors need to ignore the short-term criticism. The stock is holding up green in the face of equity markets gapping down on new tariff headlines.
Those who doubt its model do present valid points. But for the long term, UBER stock reminds me of Facebook (NASDAQ:FB). It too fell from grace in its early stages of being public. But now is an advertising juggernaut with green pastures ahead. These are companies that are too big to fail!
The potential scope for FB and UBER stock is so large that they will eventually make it work. Meanwhile, the opinions will remain bifurcated for a long while. There is no doubt that Uber is a growth company. So most experts agree with me and, for now, give it a pass on profitability. The problem is with the size of their losses. These are not typical numbers … but then again, this is not a typical company.
So the biggest disconnect comes from the fact that everyone is looking for the Uber road to profitability. It has only been weeks since their IPO, and already they are asking it to show them the money.
The Right Way to Play UBER Stock
That’s the wrong way to look at it. I am interested in the growth metrics, and they are still impressive. While naysayers concentrate on some slowing growth, I contend that it’s still 20% year over year revenue growth. The exciting part is that they have not yet even started scratching the surface of the potential.
Every once in a while we get a company that is so outside of the norm that it disrupts the typical metrics by which experts evaluate it. UBER is the largest disruptor perhaps since Amazon (NASDAQ:AMZN).
So I don’t judge it now based on the typical guidelines. The fundamentals now are insane but that’s the reason to own it for the long term.
Management reported earnings last night and investors, after a little hesitation, are liking it. The results were not perfect, but they beat sales expectations with no negative surprises on the bottom line. Their gross bookings before payouts came in at the top end of the range.
Critics take issue with the driver incentives and for good reason. These almost doubled so they are a concern for now but eventually they will taper off to settle where they makes sense. For now I expect growth companies to spend a lot to feed the beast.
Then there is Uber EATS. It’s an exciting source of income, but it, too, has questionable margins, especially since it has subsidies. These could mask serious problems with that part of the operation.
Most importantly though, on his conference call, UBER CEO Dara Khosrowshahi sounded confident that they are still on track. Although they didn’t offer specific guidance, it is important to note that he stated that they are committed to “create long term value for investors…” This is his commitment that they do aim to be profitable. A popular opinion now is that they will never be profitable.
Another point from Mr. Khosrowshahi spurs my interest for the long term, and that’s the focus on “the movement of people and powering local commerce.” The commercial clients list is growing, and these are clients that are sticky and have deeper pockets than regular riders.
The point is that UBER stock only has three income venues now with Rides, Eats and Freight. But there are unlimited possibilities for the future. Uber freight is showing a rapid ramp, so it’s in its infancy stage.
The Uber app is probably already on practically every smart phone on the planet, so it’s hard to see how they fail at monetizing this. Currently they only have a tiny fraction of the addressable markets in users and dollars.
I do acknowledge that UBER stock has its challenges here. Growth rate could be slowing, the take rate is falling but still is 18%, and they have a high churn in drivers. But the company is still establishing itself, so I would plug my noise here and own it for the long haul. This is not an overnight success so the IPO event debacle is a mere blip on the radar.
The bottom line is that the combination of the scary metrics and the botched IPO shook all the weak hands out of Uber stock. The stronger hands still in will require something really bad to get them to sell it. This is the definition of support below. This is a stock I can hold knowing that fellow owners of it are not easy to scare thereby limiting the downside potential while I wait for the upside reward.
Management offered no specific guidance but exudes a certain posture. They see a huge market opportunity and they have only begun to scratch the surface. So it’s not a matter of who will win UBER or Lyft (NASDAQ:LYFT). There is room for both and many more to thrive. UBER just happens to have a huge first mover advantage and that’s why it’s my pick of the litter here.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can join his live chat room here.
